How to reduce maintenance cost the right way comes up a lot for our clients. Unfortunately, many organizations often have the goal of reducing maintenance cost.
While the maintenance cost is an important long-term outcome of maintenance management, it should not be the main goal. If the reduction of maintenance cost is the main goal for maintenance, the organization is on the wrong track and will eventually fail.
What is Maintenance Cost?
There is no universal definition of maintenance cost. Maintenance cost is a subset of the total production cost. The slice that is defined as “maintenance cost” can therefore quite liberally be described however a company wants to describe it as long as it follows local tax rules and regulations. Below are some examples.
Lubricants: Some companies include it in the maintenance cost while others label it as an operational expense.
Consumables: Frequently changed maintenance consumables such as cutting tools are often classified as an operational expense, whereas consumables that are changed less frequently are often in the maintenance budget. Common examples of this include air filters, oil filters for hydraulic units, and refiner plates and chipper knives.
Company, local state/province and international tax laws differ and change over time, which adds another level of variability of the definition of maintenance cost. Additionally, the constantly changing international currency exchange rate adds another layer of variability if maintenance costs are compared across international borders.
Financial performance often impacts how maintenance cost is defined. For example, classifying a cost as “capital” investment costs versus “expense” changes if a company is making a profit or a loss any given year. This is not talked about a lot because most companies have very clear rules about what to capitalize and what to expense.
In reality, it is very common that, for example, a $50,000 investment is changed into two, $25,000, investments in order to classify it as an expense.
A few final factors that change the maintenance cost between plants:
- Maintenance Debt
- Difference in plant assets and production flow & products produced
- Equipment selection & engineering before start-up
If a plant has been poorly maintained in the past and much maintenance has been deferred, there is a lot of maintenance to do in the future. If the plant is well maintained, there is less maintenance to do in the future.
There may be two identical plants, side by side, one well maintained and one poorly maintained. The future annual maintenance cost will be higher in the poorly maintained plant since equipment has more maintenance to be done than the well-maintained plant. The age of the plant plays into the maintenance debt since an older plant often has more future maintenance than a newer plant (however, it is not always true, some things were very well built in the past).
An obvious, but sometimes disregarded factor in looking at the maintenance cost, is the difference in the plant’s assets and what they produce. Two plants that are producing the same products are seldom alike. Age and type of equipment are different as well as the production flow. If one plant selected equipment with good maintainability, inspectability and reliability, they will have a lower maintenance cost than a plant that has not spent that investment up front. If plants are completely different, it would be absurd to try to compare the maintenance cost. A coal mine will have very different maintenance costs compared to an electronics factory.
The article “Defining Your Plant’s Maintenance Costs” by IDCON Inc. provides some helpful guidelines around classification of maintenance cost.